Analysts Predict Positive Returns from Cement Sector

Analysts at Afrinvest (West Africa) have said the cement sector will deliver superior returns given the wide infrastructure gap in the country.

In a report on the sector, Afrinvest highlighted factors that had posed the most challenges to the cement sector. It also identified recent strategies being implemented to tackle some of these challenges.

According to the analysts, in the aftermath of the 2016 economic recession, growth in the Nigerian economy was still stuck below pre-recession and pre-oil price shock levels. They explained that while there have been signs of a recovery, many sectors are yet to fully recover from what is clearly a broad-based downturn in the economy.

“The cement sector has not been spared from this carnage, with the sector recording a precipitous decline in growth given that it tracks the performance of the economy closely. Between 2000 and 2014, the cement sector expanded at a robust compound annual growth rate (CAGR) of 13.7 per cent.

“However, growth has averaged -1.0 per cent in the past three years, with only a marginal recovery in growth to 4.5 per cent in 2018. Similarly, in other sectors of the economy where activities support the cement sector — the real estate and construction sectors — growth has been lackluster,” they said.

Afrinvest, noted that for companies in the cement industry, the pains of a slowing economy have been devastating.

“The steep currency devaluation recorded between 2014 and 2017 led to an increase in costs, given the exposure of energy costs and debt to foreign currency risk. Combined with the moderation in the spending power of consumers, high costs led to a steep increase in cement prices, which in turn affected volumes of cement sold.

“The implications were a broad-based decline in margins across companies, with overall profitability barely growing over a five-year period,” the firm said.

However, the analysts noted that in recent times, the cement sector has started recovering.

“Energy costs have been diversified and foreign exchange (FX) risks are now limited. We are optimistic of a recovery in volumes which will boost revenues, and that lower energy costs will support a fast-paced expansion in profitability in 2018.

“Over the medium-term, we believe the cement sector remains well placed to deliver superior returns given the wide infrastructure gap in Nigeria. However, we expect the sector to grow at a gradual pace, given the lack of reforms to drive growth

back to long-term trend,” they said.

According to the analysts, based on their measured positive outlook, they believe there was still value in cement companies.

“The overall sector is currently priced at a discount with a P/E ratio and EV/EBITDA ratios of 12.5x and 14.0x per cent, which is below the average of 23.1x and 15.9x respectively for select emerging markets and frontier markets peers. Across companies under our coverage, we have issued “BUY” rating to Dangote Cement and “SELL” to Lafarge.

“For Cement Company of Northern Nigeria Plc (CCNN), we are waiting on the combined books of the newly merged entity before revising our valuation. Lafarge Africa which had high exposure to foreign currency debt has gotten new debt terms that will ensure lower finance costs and a return to profitability,” they said.